Jio GigaFiber is here. Where do broadband companies go?
‘Nowhere’ seems to be the most likely answer. It’s a classic case of what happens when companies are too busy acquiring customers at the expense of thinking ahead.
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Soumya Gupta
11 Jul 2018
KUZZIE/SHUTTERSTOCK
In case you are crunched for time, here’s the short version of this story. The combined market cap of all listed broadband and cable operators in the country is less than INR5,000 crore. Meanwhile, Reliance Jio is launching its nationwide fibre-optic network, GigaFiber, with an investment of INR2.5 lakh crore.
Now, the long version. It begins with a long, and long-anticipated, announcement by Reliance Industries chairman Mukesh Ambani at the firm’s annual general meeting last week.
"Optical fibre-based fixed-line broadband is the future … Jio is determined to move India to among the top five in fixed-line broadband, too. Your company has already invested over INR250,000 crore for creating state-of-the-art digital infrastructure to provide mobile and broadband connectivity across the country, with the largest fibre footprint … We will now extend this fibre connectivity to homes, merchants, small and medium enterprises, and large enterprises simultaneously across 1,100 cities to offer the most advanced fibre-based broadband connectivity solutions.
"Having the ability to compete in the global marketplace using digital tools and techniques that are powering the FOURTH INDUSTRIAL REVOLUTION … We are calling this fibre-based broadband service JIO GIGAFIBER."
The message is clear. Just as Jio shoved India's telecom firms into their worst times, it’ll plunge the country's broadband firms into an existential crisis. Stocks of broadband companies fell 18% the day Ambani made his speech. Hathway Cable & Datacom, the biggest among them in terms of market capitalisation, touched a one-year low in intra-day trade.
What will broadband companies do now?
There are only an estimated 18 million broadband subscribers in India. Jio wants to be in 50 million homes. India’s broadband market as it exists today is dwarfed by Jio's mind-numbing ambition.
Combine this with fears that Jio might offer broadband packages that are ridiculously cheap, setting the stage for price wars of the kind that eroded telecom firms’ bottom lines for the past year.
Where do companies like Hathway go from here? According to most investors, nowhere. The stocks of Hathway, GTPL (a Hathway group firm), Den Networks, and Siti Networks have been dropping dramatically for the last one year. These four stocks are trading at half of what they used to be in July 2017. In contrast, the benchmark NSE Nifty has risen 12% since then. "Broadband, fixed-line Internet, was the next big connectivity opportunity," says an executive at a private equity firm, which invests in the media industry, on the condition of anonymity. "Hathway and ACT are the biggest private broadband providers in India. Right now, these multi-service operators (MSOs) have last-mile [reach] into housing societies and people’s homes. Reliance Jio does not. And broadband is a sticky business because it takes time and effort to set up a connection. So for these firms, their existing customers will remain. But the new, first-time users of broadband? All of that will go to Jio."
How did MSOs get here?
MSOs first made their money via cable and set-top boxes. At the height of the government's phased drive to digitise set-top boxes (2012-16), companies like Hathway rushed to acquire customers by handing out boxes lest they were lost to direct-to-home satellite television. In that zeal, these companies lagged in collecting data and money from the new subscribers. That hit revenues for a long time.
"Now, Hathway and others will have to match their prices with Jio's to get customers, and also to retain the existing ones if the difference is too great. And knowing Reliance, they could very well offer Jio for some ridiculously low amount," says the private-equity executive quoted earlier.
Sell-side analysts tracking these firms predict a similar fate for the broadband business.
In a note from brokerage JM Financial dated May 29, analyst Sanjay Chawla says Hathway’s broadband revenue growth had slipped, leading to lower average revenue per user (ARPU). This downside will continue, especially because GTPL had "poor broadband execution" even with the looming Reliance threat.
Broadband revenue growth fell to 11% year on year for FY18, after growing 75% the previous year. JM Financial is modelling for stagnant ARPUs in the next three-four financial years after a drop of 12%.
The brokerage flagged similar concerns for rival Siti Networks, noting that broadband revenues grew only 4% in FY18. Its ARPU from the business is also expected to stagnate.
What will be the magnitude of this fall and stagnation? According to another brokerage firm, Jefferies, broadband ARPUs in India currently range between INR400 and INR1,000. Domestic brokerages are predicting broadband ARPUs to fall and plateau at INR450 for GTPL and Siti. Right now, Hathway and Bharti Airtel — the largest private providers of broadband in India — have ARPUs of around INR750 and INR950, respectively.
When contacted, Hathway was not immediately available to comment. But its management offered to meet at a later date.
Can investors eke out any hope at all?
For some investors, still sitting on stocks of the incumbents, what is playing out right now is nothing more than an industry disruption that was always on the cards.
Comparing Jio with Amazon, a portfolio-management services (PMS) firm terms it as "nothing more than a disruption that has scared investors in the space away with seemingly endless money and muscle." The note was shared by investors requesting anonymity.
But, the PMS firm argued in its note to clients that it made sense to have put money in the broadband business because it had relatively lower competition and was largely funded by internal accruals rather than free-flowing external funds. Jio's ambition, investors argue, will simply help increase the size of the broadband market, allowing everyone to earn more from Indian customers.
Another source of optimism is that investors in these firms could get an exit.
"Cable TV digitisation is done. And broadband's growth will be dictated by Jio. This leaves companies like Hathway to partner, or perhaps to get acquired," says the executive at the private-equity firm quoted earlier.
"I would have thought Jio could partner with the MSOs for last-mile connectivity. Getting permissions and putting in lines into the homes takes time and capital. But it doesn’t look like Jio is going [that route]. They seem to be going into it alone."
(With additional inputs from Pravin Palande)
CONTRIBUTORS WHO HAVE COMMENTED ON THIS STORY
test
Soumya Gupta ET Prime, Senior Staff Writer
test
Madhav Samant NAP Financial Wellness LLP, Managing Partner
test
Manikandan Sanjive RBL Bank Ltd, Corporate Banking
2 CONTRIBUTOR COMMENTS
• FEATURED
16 days ago
Madhav Samant
Managing Partner , NAP Financial Wellness LLP
As the Chairman said in his speech Jio is on its way to becoming a data behemoth. In western countries its all streaming is through broadband and hence valuations of companies such as Netflix are stratospheric. Not only will cable companies will suffer but also DTH. I am infact seriously reviewing whether I should continue with my Tata Sky connection. A cost effective broadband connection + Netflix would suit me just fine. Somebody now just needs to stream the English Premier League and I will be off Tata Sky in a jiffy :).
Like 3 likes
o
Soumya Gupta
Senior Staff Writer , ET Prime
Hi Mr. Samant, I totally agree! I cut the cord on cable nearly 7 years ago and I haven't missed it much, except during live football/cricket matches when current broadband speeds tend to dip slightly. With all this incoming competition, I expect firms will begin to upgrade infrastructure and solve their speed and connectivity issues.
Like 0 like 11 days ago
o
• 16 days ago
Manikandan Sanjive
Corporate Banking , RBL Bank Ltd
I think fixed line Broadband industry is going to get disrupted in short run. Jio has high competing edge - the network strength of Jio is also well proven in the pre-paid SIM segment and the price point of broadband is expected to be lower compared to peers. I could envisage a good number of switch over of customers from existing service providers to JioFiber in additon to fresh customers. As we have seen in telecom, this industry will get disrupted shortly (unless the existing players reduce their prices sacrificing the margins in long run or discover an efficient cost structure) and it may be headed for consolidation. Also, whether Jio will partner with existing service providers is a big question mark (But there is no need for Jio to partner with existing service providers as I presume they have a solid business plan like they had in pre-paid SIM segment and have financial muscle).
Like 3 likes
o
Soumya Gupta
Senior Staff Writer , ET Prime
Hi Mr. Sanjive, totally agree, Jio may completely bypass existing players despite how difficult last mile connectivity can get. Some investors did tell us that customer stickiness in broadband is high, so maybe existing providers will hold on to their current customer base for now.
‘Nowhere’ seems to be the most likely answer. It’s a classic case of what happens when companies are too busy acquiring customers at the expense of thinking ahead.
Share Gift this article
Soumya Gupta
11 Jul 2018
KUZZIE/SHUTTERSTOCK
In case you are crunched for time, here’s the short version of this story. The combined market cap of all listed broadband and cable operators in the country is less than INR5,000 crore. Meanwhile, Reliance Jio is launching its nationwide fibre-optic network, GigaFiber, with an investment of INR2.5 lakh crore.
Now, the long version. It begins with a long, and long-anticipated, announcement by Reliance Industries chairman Mukesh Ambani at the firm’s annual general meeting last week.
"Optical fibre-based fixed-line broadband is the future … Jio is determined to move India to among the top five in fixed-line broadband, too. Your company has already invested over INR250,000 crore for creating state-of-the-art digital infrastructure to provide mobile and broadband connectivity across the country, with the largest fibre footprint … We will now extend this fibre connectivity to homes, merchants, small and medium enterprises, and large enterprises simultaneously across 1,100 cities to offer the most advanced fibre-based broadband connectivity solutions.
"Having the ability to compete in the global marketplace using digital tools and techniques that are powering the FOURTH INDUSTRIAL REVOLUTION … We are calling this fibre-based broadband service JIO GIGAFIBER."
The message is clear. Just as Jio shoved India's telecom firms into their worst times, it’ll plunge the country's broadband firms into an existential crisis. Stocks of broadband companies fell 18% the day Ambani made his speech. Hathway Cable & Datacom, the biggest among them in terms of market capitalisation, touched a one-year low in intra-day trade.
What will broadband companies do now?
There are only an estimated 18 million broadband subscribers in India. Jio wants to be in 50 million homes. India’s broadband market as it exists today is dwarfed by Jio's mind-numbing ambition.
Combine this with fears that Jio might offer broadband packages that are ridiculously cheap, setting the stage for price wars of the kind that eroded telecom firms’ bottom lines for the past year.
Where do companies like Hathway go from here? According to most investors, nowhere. The stocks of Hathway, GTPL (a Hathway group firm), Den Networks, and Siti Networks have been dropping dramatically for the last one year. These four stocks are trading at half of what they used to be in July 2017. In contrast, the benchmark NSE Nifty has risen 12% since then. "Broadband, fixed-line Internet, was the next big connectivity opportunity," says an executive at a private equity firm, which invests in the media industry, on the condition of anonymity. "Hathway and ACT are the biggest private broadband providers in India. Right now, these multi-service operators (MSOs) have last-mile [reach] into housing societies and people’s homes. Reliance Jio does not. And broadband is a sticky business because it takes time and effort to set up a connection. So for these firms, their existing customers will remain. But the new, first-time users of broadband? All of that will go to Jio."
How did MSOs get here?
MSOs first made their money via cable and set-top boxes. At the height of the government's phased drive to digitise set-top boxes (2012-16), companies like Hathway rushed to acquire customers by handing out boxes lest they were lost to direct-to-home satellite television. In that zeal, these companies lagged in collecting data and money from the new subscribers. That hit revenues for a long time.
"Now, Hathway and others will have to match their prices with Jio's to get customers, and also to retain the existing ones if the difference is too great. And knowing Reliance, they could very well offer Jio for some ridiculously low amount," says the private-equity executive quoted earlier.
Sell-side analysts tracking these firms predict a similar fate for the broadband business.
In a note from brokerage JM Financial dated May 29, analyst Sanjay Chawla says Hathway’s broadband revenue growth had slipped, leading to lower average revenue per user (ARPU). This downside will continue, especially because GTPL had "poor broadband execution" even with the looming Reliance threat.
Broadband revenue growth fell to 11% year on year for FY18, after growing 75% the previous year. JM Financial is modelling for stagnant ARPUs in the next three-four financial years after a drop of 12%.
The brokerage flagged similar concerns for rival Siti Networks, noting that broadband revenues grew only 4% in FY18. Its ARPU from the business is also expected to stagnate.
What will be the magnitude of this fall and stagnation? According to another brokerage firm, Jefferies, broadband ARPUs in India currently range between INR400 and INR1,000. Domestic brokerages are predicting broadband ARPUs to fall and plateau at INR450 for GTPL and Siti. Right now, Hathway and Bharti Airtel — the largest private providers of broadband in India — have ARPUs of around INR750 and INR950, respectively.
When contacted, Hathway was not immediately available to comment. But its management offered to meet at a later date.
Can investors eke out any hope at all?
For some investors, still sitting on stocks of the incumbents, what is playing out right now is nothing more than an industry disruption that was always on the cards.
Comparing Jio with Amazon, a portfolio-management services (PMS) firm terms it as "nothing more than a disruption that has scared investors in the space away with seemingly endless money and muscle." The note was shared by investors requesting anonymity.
But, the PMS firm argued in its note to clients that it made sense to have put money in the broadband business because it had relatively lower competition and was largely funded by internal accruals rather than free-flowing external funds. Jio's ambition, investors argue, will simply help increase the size of the broadband market, allowing everyone to earn more from Indian customers.
Another source of optimism is that investors in these firms could get an exit.
"Cable TV digitisation is done. And broadband's growth will be dictated by Jio. This leaves companies like Hathway to partner, or perhaps to get acquired," says the executive at the private-equity firm quoted earlier.
"I would have thought Jio could partner with the MSOs for last-mile connectivity. Getting permissions and putting in lines into the homes takes time and capital. But it doesn’t look like Jio is going [that route]. They seem to be going into it alone."
(With additional inputs from Pravin Palande)
CONTRIBUTORS WHO HAVE COMMENTED ON THIS STORY
test
Soumya Gupta ET Prime, Senior Staff Writer
test
Madhav Samant NAP Financial Wellness LLP, Managing Partner
test
Manikandan Sanjive RBL Bank Ltd, Corporate Banking
2 CONTRIBUTOR COMMENTS
• FEATURED
16 days ago
Madhav Samant
Managing Partner , NAP Financial Wellness LLP
As the Chairman said in his speech Jio is on its way to becoming a data behemoth. In western countries its all streaming is through broadband and hence valuations of companies such as Netflix are stratospheric. Not only will cable companies will suffer but also DTH. I am infact seriously reviewing whether I should continue with my Tata Sky connection. A cost effective broadband connection + Netflix would suit me just fine. Somebody now just needs to stream the English Premier League and I will be off Tata Sky in a jiffy :).
Like 3 likes
o
Soumya Gupta
Senior Staff Writer , ET Prime
Hi Mr. Samant, I totally agree! I cut the cord on cable nearly 7 years ago and I haven't missed it much, except during live football/cricket matches when current broadband speeds tend to dip slightly. With all this incoming competition, I expect firms will begin to upgrade infrastructure and solve their speed and connectivity issues.
Like 0 like 11 days ago
o
• 16 days ago
Manikandan Sanjive
Corporate Banking , RBL Bank Ltd
I think fixed line Broadband industry is going to get disrupted in short run. Jio has high competing edge - the network strength of Jio is also well proven in the pre-paid SIM segment and the price point of broadband is expected to be lower compared to peers. I could envisage a good number of switch over of customers from existing service providers to JioFiber in additon to fresh customers. As we have seen in telecom, this industry will get disrupted shortly (unless the existing players reduce their prices sacrificing the margins in long run or discover an efficient cost structure) and it may be headed for consolidation. Also, whether Jio will partner with existing service providers is a big question mark (But there is no need for Jio to partner with existing service providers as I presume they have a solid business plan like they had in pre-paid SIM segment and have financial muscle).
Like 3 likes
o
Soumya Gupta
Senior Staff Writer , ET Prime
Hi Mr. Sanjive, totally agree, Jio may completely bypass existing players despite how difficult last mile connectivity can get. Some investors did tell us that customer stickiness in broadband is high, so maybe existing providers will hold on to their current customer base for now.
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